The downward pressure on costs can also be seen in the advisory world and is starting to be seen within hedge funds, which have seen about $60 billion in outflows this year.
And it is likely to get even worse. The U.S. Department of Labor’s conflict-of-interest rule will require that advisers put client interests first in picking investment vehicles. This rule, which goes into effect in April, is the reason BlackRock gave last week for slashing its fees -- again -- on ETFs to near-free levels. BlackRock is cannibalizing its business to survive in the low-cost, post-DOL Vanguardian future.
This accelerating shift to low costs is sure to be felt across the financial world because fees earned off of retail products produce an outsized portion of the industry’s revenue. So the ripple effects are big. And when asset managers make less money, so do the Wall Street banks they trade with, the back-office providers they use, their data vendors, PR firms, and so on.
The reason all this isn’t more obvious right now is that the bull market in stocks and bonds over the past eight years has basically offset the fee losses.
Using Janus as an example, its U.S. mutual funds -- which have an average fee of 0.81 percent -- saw approximately $40 billion in outflows over the past five years, which is nearly half of its assets. Yet, the funds’ assets increased over the same period from $87 billion to $107 billion:
It seems like magic, but it’s because the stocks and bonds in the funds’ holdings rose in value. Asset management may be one of the only businesses where customers can leave in droves and it doesn’t immediately affect the bottom line. Janus’s situation is a microcosm of the entire fund industry’s: Its revenue source is shrinking, but you can’t see it in the total asset or revenue numbers.
These kinds of market returns are unlikely to last forever. The second-longest bull market in history is getting on in years, and most predict muted returns at best going forward. This is the writing on the wall Janus must have seen. So it found a partner before it was forced to.
Don’t be surprised if others do the same.
This story was provided by Bloomberg News